There's an interesting argument to be had about whether having Greece within the euro strengthens the currency or whether allowing it (or forcing it) to leave would do so. This depends upon two things, firstly what we mean by strength and secondly our views about what would happen to Greece it if left. So, to be clear here, strength as used here does not mean rise or fall in relation to the dollar, it's a description of long term survival as a currency. And my own opinion is that Greece remaining in will make the currency stronger in that sense: for I think that Greece would, after a a very hard time of it indeed, thrive outside the single currency.
This musing is brought on by two weekend pieces. Firstly, an interesting overview at Reuters:
The latest episode of Greece's debt crisis has revived doubts about the long-term survival of the euro, nowhere more so than in London, Europe's main financial center and a hotbed of Euroskepticism.
The heightened risk of a Greek default and/or exit comes just as there are signs that the euro zone is turning the corner after seven years of financial and economic crisis and that its perilous internal imbalances may be starting to diminish.
If things are getting better despite even this crisis then perhaps we might conclude that the euroe is in fact stronger than most of us thought. And then there's this:
A euro break-up would also bring major problems for Germany's financial institutions. It would be bad news for all the Greek and peripheral market government bonds that German banks still hold and bad news for all the loans they make that are dependent on intra-euro zone trade. German financial stability would be at grave risk.
And yes, I can see the truth in that.
However, my view is somewhat different. As long as the euro continues to be a one way system then it will be stronger than if it is seen that people can leave it. Currently there's no legal way to leave the eurozone. Further, no one has really tested a manner in which it could be done. So, simple intertia keeps everyone thinking that it won't be done.
But then imagine what would happen if Greece did leave. Firstly, and most obviously, there would be the troubles described above and also Greece itself would have a very torrid time of it. But that would be in the short term. My reading of it is that after a year or two of that very hard time then Greece would start to recover and do so both well and quickly. And it would be at that point that the euro would be at its weakest. For the other periphery countries (Portugal, Spain and most importantly perhaps, Italy) would see that leaving is both possible and also "works".
At which point the euro would be weaker than it ever has been. So, I would argue that keeping Greece in the euro strengthens it. Simply because a successful exit by Greece would greatly weaken it.
